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Russia Outmaneuvers U.S. LNG

For years, boosters of U.S. LNG have trumpeted the fact that gas exports from the Gulf of Mexico could break Russia’s grip on the European energy market. That has yet to be the case, and in fact, Russia has managed to respond with various strategies to maintain its market share on the continent.

“The United States is not just exporting energy, we’re exporting freedom,” U.S. Secretary of Energy Rick Perry said in early 2018. “We’re exporting to our allies in Europe the opportunity to truly have a choice of where do you buy your energy from. That’s freedom. And that kind of freedom is priceless…There’s no strings attached when you buy American [liquid natural gas]. So that’s world-changing.”

That comment from Perry crystalizes conventional wisdom in Washington. Europe relies on Russia for about a third of its gas needs. For years, Russia’s Gazprom was able to bind various European countries up into rigid contracts with fixed prices, often linked to higher crude oil prices. Worse, Russia tended to negotiate bilateral deals, and would offer preferential terms to friendly countries and higher prices to others. These practices raised the ire of the European Commission’s antitrust regulator, which forced Gazprom to dial back on such strong-arm tactics.

But with few alternatives, there was little prospect of fundamental change – Europe would still need Russian gas for the long haul.

The most promising alternative came from U.S. LNG. Cheap shale gas sparked a wave of investment earlier this decade. Cheniere Energy brought its Sabine Pass LNG facility online nearly three years ago, and several more terminals are in the works.

The mere threat of American LNG arriving in Europe arguably weakened Gazprom’s hand. Lithuania, for instance, forced Gazprom to agree to pricing concessions when it managed to bring in a floating LNG import terminal, opening up the door to imported gas from places other than Russia.

Last year, the first American LNG cargo arrived in Lithuania. “U.S. gas imports to Lithuania and other European countries is a game changer in the European gas market. This is an opportunity for Europe to end its addiction to Russian gas and ensure a secure, competitive and diversified supply,” Lithuanian President Dalia Grybauskait? wrote to Foreign Affairs at the time. Related: Goldman: Oil Prices Set For Rebound In 2019

However, things have not changed as much as some had hoped. Russia’s market share in Europe is little changed. This has occurred for several reasons. First, very few U.S. LNG cargos have actually arrived in Europe. Second, Russia is not sitting by watching its position erode. Instead, it has expanded its own use of LNG and it has also redoubled its efforts at locking European buyers into gas via pipelines.

Moreover, as Russia faces some challenges in Europe, it has also pivoted to Asia to diversify its markets. China is the world’s fastest growing gas market, and China is one of the biggest reasons why global LNG prices have rebounded much quicker than analysts anticipated. Russia would be foolish not to focus gas sales on China. The two countries are set to open a long distance pipeline by the end of next year that will move more Russian gas into China. Russia’s LNG shipments to India are also picking up.

It’s a two-prong strategy that has proven successful to date. “Our main goal is to preserve our current markets, primarily Europe, and to gain a foothold in new ones, especially Asia,” Alexey Teksler, Russia’s first deputy Minister of Energy, told the Wall Street Journal. Over time, China is set to take on much greater importance for Gazprom.

While Rick Perry wants to export more freedom, the U.S.-China trade war has resulted in Chinese tariffs on American LNG. That will make U.S. gas much less competitive in China relative to other sources of gas, such as from Russia. Related: The Oil Powerhouses Replacing OPEC

It is not as though U.S. LNG has not had any impact at all. The pricing concessions offered by Gazprom, and the increasing shift towards more market-based pricing for Gazprom in Europe (as opposed to rigid contracts), is arguably the largest achievement that American LNG has secured. According to the WSJ, Gazprom’s average selling price fell by nearly 50 percent since 2013, although much of that is also the result of falling crude oil prices. Competition from the U.S., as well as antitrust scrutiny from Brussels, means that Gazprom cannot demand exorbitant prices.

But other than that, U.S. LNG has not done much else to beat back Russia in the European market.

Also, Russia can still offer cheaper gas than U.S. suppliers in many places. Gazprom may have had to lower prices to Europe to keep U.S. LNG out, but it can easily undercut American exporters. Even in India, Gazprom inked a 20-year agreement for gas at $7/MMBtu, which the WSJ says is about $1 to $1.50/MMBtu cheaper than anything coming from Qatar or the U.S.

Weakening Russia’s energy grip over Europe has been a perennial goal of U.S. administrations dating back decades. But Russia continues to adapt and outmaneuver Washington.

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The arrival of US LNG merely kept a lid on how much the Russians could charge for their NG.

It will never be a fair fight between LNG by ship and NG by pipe.

Steven Conn on November 28 2018 said:

US LNG is not only more expensive that Russian LNG and piped gas, but Washington has had to pressure EU buyers like Germany, and to threaten sanctions, in order to push it's LNG into Europe. The article conveniently hides the higher prices Lithuania and Poland, small market buyers, will have to pay for "freedom gas".
US LNG can be bought in Europe after lobbying and pressure. Russian gas does best via market competition. As for claims of high prices or oil linked pricing, Gazprom did not create or maintain these, but accepted what was the established practice in EU, as done by Norway, Netherlands, and UK.

I see no effect so far on Gazprom from the minor US LNG shipments. Price decline from 2013 is fully due to radical fall in oil prices.

Steven Conn
Newton, MA

Bob on November 28 2018 said:

To Refman, re: "It will never be a fair fight between LNG by ship and NG by pipe."

Agreed. and it only gets worse over time, as Russia amortizes cost for construction of the pipeline, the only remaining costs will be pipeline maintenance, while US LNG faces heavy shipping costs that recurs with every shipment.

Mamdouh G Salameh on November 29 2018 said:

When it comes to the Natural gas and LNG market, Russia is on a win-win ticket. It has consolidated its grip on the European Union’s (EU’s) natural gas market well into the future by offering reliable and cheap supplies of natural gas. Russia already has a huge gas pipeline network into the EU, great reserves of gas and reliability as a gas supplier. And with the completion of both Nord Stream 2 and the Turk Stream by the end of 2019, its grip on the EU’s natural gas market will be unshakeable.

Moreover, Russia has been pivoting very successfully towards the world’s fastest energy growing market ‘China’. Three years ago Russia overtook Saudi Arabia to become China’s biggest supplier of crude oil. It will soon establish itself also as the largest natural gas and LNG supplier to China’s thirsty gas market enhanced by the completion of the Spirit of Siberia’s gas pipeline by the end of this year.

The EU has always stated that it is willing to buy US LNG as part of its energy diversification but not at any price. US LNG currently is not competitive on the EU market. Until US LNG matches the price of Russian piped gas, it stands no chance against Russian gas supplies in most of the EU countries.

Moreover, the EU countries know that US opposition to Russia’s dominance in the EU gas market and Nord Stream 2 which will bring more Russian gas supplies under the Baltic Sea to Germany and the EU is motivated mostly by self-interest of displacing Russian gas supplies with US LNG supplies and also by trying to loosen Russia’s grip on the EU gas market.

And while the US Energy Secretary Rick Perry can tell the EU countries that the US is not just exporting LNG but also freedom, the Europeans think differently. First they buy Russian gas not because it is imposed on them but because Russian gas supplies are reliable, efficient and cheap. Second, they don’t see themselves under the boots of Russia. Third, their energy policy can’t be dictated in Washington. As Angela Merkel told President Trump, Europe’s energy policy will be determined in Brussels. And while freedom is priceless, the Europeans can’t keep their homes warm and their lights on without Russia’s natural gas supplies.

Still, US LNG supplies to Europe will strengthen the Europeans’ hand when negotiating prices with Gazprom over its gas supplies to Europe.

If Poland and Lithuania decided to exchange cheap Russian gas supplies for the more expensive US LNG for political reasons, that is their affair. But it is very idiotic on economic grounds to pay more for US LNG just to spite Russia and curry favour with the United States. I am sure President Putin will not lose a minute’s sleep over Poland’s and Lithuania’s decision.

Last time Russia (Sovjetunion) crashed it was because it had no more money.

So forcing Russia to charge less for their gas is the opposite of being outmaneuvered.

Then again why Germany wants to buy Russian gas is lost on me. For every Euro in trade that Germany has with Russia, Germany will have to spend two Euros in defense costs to protect the border from them.

Then again... Germans aren't always that bright. ;)

Peter on November 30 2018 said:

US Gulf Coast LNG is competitive with Russian piped gas. Russia sold to India for $7/MMbtu. US LNG can be priced at $6 to $7/MMbtu and can get more competitive. $2/MMbtu is capital costs that amortize over twenty years. In addition US Gulf Coast LNG is in oversupply as a byproduct of shale oil drilling. Oversupply is likely to continue. Currently US gas is selling at a negative price taking another $3/MMbtu off the $7 price.

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